ACCOUNTING ENTRIES

Acquisition
The term ‘acquisition’ rather than ‘purchase’ is normally used with regards to non-current assets. The two terms mean exactly the same, but in order to avoid confusion between expenditure on non-current assets (capital expenditure) and expenditure on goods for resale (revenue expenditure), we tend to refer to ‘acquisition of a non-current asset’ and
‘purchase of goods for resale’.

To record the acquisition of a non-current asset we need to remember that, as for any other transactions, the dual aspect must be reflected. This requires clear thinking – especially if the cost is not paid immediately. Therefore, the best way to consider this is to start with a straightforward acquisition, which is paid in full at the point of acquisition. We can then adapt our treatment to reflect an acquisition on credit or by raising some form of finance.

Finally, the most complex possibility – when part of the cost is settled by selling a non-current asset – is considered in the section below on ‘part exchange’. 

When a non-current asset is paid for immediately, the payment is likely to be by cheque. As non-current assets are usually quite expensive, it is unlikely that any organisation would use cash (notes and coins). Thus, the dual aspect is that  non-current assets have increased, while the current asset of the balance at the bank has reduced. (Or, if the bank account
is already overdrawn, the overdraft will increase.)

So, the double entry is as follows:
                       Debit Non-current assets at cost
                                                                   Credit Bank

If the cost of the asset is not paid immediately, two possibilities are that a normal period of trade credit has been obtained, or a loan has been raised to pay for the asset.
In the case of trade credit, the credit entry will be to the trade payables account. If a loan is raised, we will create a loan account with a credit entry, and debit the cash account with the receipt of the loan, and then the double entry is the same as above.

Depreciation
It is important to note that depreciation does not involve a cash transaction. Rather, it is a book entry, whereby a share of the cost of non-current assets is transferred to create a charge against profit. The accounting equation is maintained, as the value of non-current assets is reduced, by the same amount as the charge against profit.

From this, it follows that the depreciation charge leads to a debit entry in an expense account (depreciation charge). The corresponding credit entry is to the non-current asset. As it is convenient to maintain a record of the cost of non-current assets, we carry the reduction in value to date as a separate balance. Therefore, the credit entry is not made in the same ledger account as the cost of non-current assets. Rather, a separate account (accumulated depreciation) is used to record the amount of depreciation charged to date.

Thus the entry is:
            Debit Depreciation charge
                                 Credit Accumulated depreciation

Disposal
To deal with the disposal of a non-current asset, several steps are required.
As discussed above in the section on depreciation, the balances relating to the asset are carried in two accounts. So, to remove the asset from the accounting records, we must make a credit entry in the cost account, and a debit entry in the accumulated depreciation account. These entries are completed with corresponding entries in the asset disposal account. The entries are:
Cost of asset:
Debit Asset disposal account
                                 Credit Non-current assets at cost

Accumulated depreciation to the point of disposal:
Debit Accumulated depreciation account
                                 Credit Asset disposal account

These entries mean that the net book value has been transferred to the disposal account. If we compare the net book value with the proceeds of disposal, the resulting balance is the profit or loss on sale. A profit arises if the proceeds are greater than the net book value; if the proceeds are less than net book value, a loss has been sustained. The balance
on the disposal account is transferred to the income statement.

Therefore, we credit the disposal proceeds to the disposal account. If the proceeds have been received immediately, they will have been lodged to the bank, leading to a debit entry in the bank account. If the buyer has been allowed a period of credit, this will be reflected by a debit entry in the trade receivables account. The other possibility is that the disposal of the asset has been a part-exchange transaction. This is considered below.

Debit Bank Cash account
Debit Accumulated depreciation account
                        Credit Non-current assets at cost
             Proit/Loss Account

Part exchange
When a non-current asset is replaced by another non-current asset, it is quite common to use the sale of the original asset as part of the transaction. This is referred to as ‘part exchange’ (or sometimes ‘trade in’). By stating the transaction in this way, we have recognised that it is, in fact, two separate transactions.

The first transaction is the sale of a non-current asset. This is dealt with in broadly the same way as the straightforward sale discussed above. The difference is that instead of receiving payment for the asset sold, the sale proceeds settle part of the cost of the acquisition. So the debit entry is made in the non-current assets at cost account. This means that the amount to be settled is the balance of the cost of the acquisition. This is recorded in the same way as any other acquisition, except that the value of the entries is less than the full cost of the acquisition.

Scrapping
When an asset is scrapped, this simply means that it has been disposed of, but the sale proceeds are nil. Therefore, there is nothing to offset against the net book value, which represents a loss.

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